The Canadian dollar started the Toronto session on the defensive and continued to backtrack in early trading. It is an entirely different story from what was seen on Friday when USD/CAD jumped to $1.4150 from $1.4050. That move was sparked by a surprise rate cut by the Bank of Canada. They slashed the benchmark overnight rate to 0.25% from 0.75% and announced a Quantitative Easing (QE) program. The BoC said the move was necessary because "The spread of COVID-19 is having serious consequences for Canadians and for the economy, as is the abrupt decline in world oil prices." The QE program was necessary to "alleviate strain in short-term funding markets" and in the Government of Canada debt market.
The USD/CAD rally was not sustained. Sellers emerged as pre-weekend profit-taking drove the U.S. dollar lower across the board. Also, the Bank of Canada’s actions served to better align their monetary policies with those of the other major G-10 central banks. Canada’s 0.25% overnight rate is the same as Australia. It is also close to that of the benchmark U.S. rate of 0-0.25%, the European Central Bank at 0.0% and the U.K. at 0.10%.
USD/CAD closed the week at $1.3988 but the reality of plunging oil prices quickly led to buying at the Asia open. Western Canada Select, Canada’s benchmark crude price is trading at $6.11/barrel, which is far below its breakeven price. The Federal government’s perceived anti-oilsands policies, a shortage of pipeline capacity combined with the slowing global demand due to COVID-19, is weighing on prices.
Saudi Arabia and Russia’s price war just made the situation worse, which suggests limited downside for USD/CAD.
It is also month-end and the 14% plunge in the S&P 500 index in March (as of today) suggests large scale buying of U.S. dollars as fund managers re-balance their portfolios. When the major U.S. stock indexes close with a loss at the end of a month, portfolio managers need to sell US dollars to bring their positions back into line with their benchmarks. That selling is evident this morning as the greenback is trading higher against all the major G-10 currencies.
The Canadian dollar, like the rest of the major currencies, is also suffering from renewed coronavirus fears. U.S. President Trump said that federal guidelines suggesting social-distancing will stay in place at least until the end of April, which dashed hopes for an early end to the crisis.
Traders were also unnerved by news Italy’s death toll from the virus crossed the 10,000 threshold.
The Canadian dollar will track broad USD dollar moves today with traders watching equities for direction.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
